22 May 2023

Weekly Outlook - FOMC Minutes in Focus as Consensus on Fed Pause Weakens


As Washington negotiates the debt ceiling, participants can look for insight for the next round of central bank meetings from the upcoming data releases, including the FOMC minutes and the U.K.'s latest CPI data.

3 Top Stories for the Week Ahead

  • FOMC Minutes on Wednesday

  • UK CPI due on Wednesday

  • RBNZ decision also on Wednesday

Traders Looking for Insights into Fed's FOMC Minutes

The FOMC raised rates by 25bps at the last meeting, but what garnered most of the attention was a change in the accompanying statement that investors initially interpreted as implying no rate hike at the June meeting, the highly anticipated "pause". However, since then, the consensus of a pause has weakened substantially, so investors are going to be pouring through the minutes of the last meeting for further insight into how committed Fed members are to raising or holding rates in June.

The dollar's rise has had substantial repercussions for most counter-currencies, with the Swiss franc no exemption from the recent drive. However, USD/CHF has met stiff resistance at the 38.2% Fibonacci retracement of the 0.9443-0.8820 leg at 0.9057 while reaching momentum overextension. If the minutes disappoint bulls, the pair could slide into deeper territories, with supports revealed at 0.8920 and the local low. However, with a momentum divergence in place to support further upside, a rally to 0.9132 could offer either a rejection or an extra boost toward 0.92, assuming the minutes signal some hawkishness at least.

Tradingview Chart: U.S. Dollar / Swiss Franc

UK Expected to Drop to Single-Digit Inflation: Reasonable?

The U.K. is expected to see a significant drop in inflation in April, with headline CPI change forecast at 8.5% compared to the 10.1% reported previously. However, a large portion of that is attributed to base effects as inflationary pressures persist. A stronger-than-expected slowdown in the monthly reading might lead to some reevaluation of how much more hiking the BOE might do.

Importantly, analysts appear optimistic about how much inflation will drop, with the widening gap between actual and expectations weighing on the pound, making it harder to reach. Combined with a bearish RSI divergence, it could be the catalyst for a reversal down to 168.00 unless 170.00 offers firm support. Conversely, exceeding expectations could see the pair rise again, gaining control of 172.50 and paving the way toward the extension highs of 174.13 and eventually 175.20.

Tradingview Chart: British Pound / Japanese Yen

RBNZ Expected to Hike More After Budget Announcement

The consensus that the RBNZ would hike at its next meeting has changed recently as the latest data have created some doubts. The New Zealandian government issued its budget for the new year, expecting a substantial deficit, but it no longer expected a recession this year. Several N.Z. banks raised their projections following the commentary, predicting a 50bps hike instead of 25bps.

EUR/NZD tends to be volatile around sentiment change levels, with the 50% Fibonacci of the upward 1.6344 -1.8089 at 1.7216 into focus. A bullish divergence spotted on the RSI indicator could support a 25bps hike, while a move toward the golden pocket at the round level of 1.70 could support a 50bps hike. In the former thesis, the pair could see prices return within the upward trend, bringing 1.7426 and 1.7570 into the spotlight. However, in the latter case, prices could see further drops depending on where the pair fares around the time of the release - the golden pocket might be reached ahead of the event -, with 1.6830 as a last resort.

Tradingview Chart: Euro / New Zealand Dollar

Top stories last week and how related assets fared

  • U.S. risk appetite caught a fresh wind after positive comments following a meeting between U.S. President and congressional leaders to overcome the debt ceiling impasse.

  • IEA forecasted demand for crude to exceed supply by 2M bbl/day in the second half of the year, supporting WTI despite a large build in inventories.

  • Japan's Q1 GDP nearly doubled expectations, supporting the yen temporarily, but BOJ Governor Ueda's insistence on easing kept adding to the USDJPY rally.

  • Australia reported a surprise jump in the unemployment rate, weakening the Aussie.

  • New Zealand government announced that it no longer sees a recession this year, supporting the Kiwi.

Major Calendar Events 22 - 26 (GMT)

Source: investing.com

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